As investors begin to assess the impact of the UK’s decision to leave the EU and its effect on commercial real estate, one thing is clear: the “Brexit transmission” channel in the US will most likely arise from currency moves as sterling depreciates by 10% against the US dollar. What does this mean for US real estate, and specifically, New York real estate?
New York was the top US destination for cross-border commercial real estate investment in 2015, absorbing more than one-quarter of the total capital flows into the country (the city also remains the top destination in the US for capital in 2016 so far this year). In contrast, the number of purchases originating from the UK was lower: just $2.7bn (£2bn) of US commercial real estate purchases came from the UK in 2015, a figure that is unlikely to rise this year.
Any further depreciation in the pound could redirect some “core” investors into the US, although opportunistic investors will anticipate any repricing of London stock. In 2015, cross-border flows into the UK totalled $70bn (excluding flows from the US), a meaningful figure in the context of the $95bn in cross-border capital that flowed into the US over the same period.
One area that could feel an impact, however, is New York tourism. Data from the private, nonprofit firm NYC & Company, the official marketing organisation for New York’s five boroughs, shows that the UK has been the largest source of overseas visitors to the city, with more than 1m UK tourists having visited annually since 2007.
Since then, the UK has topped the list for the most foreign visitors every year except 2012 (when Canada exceeded the UK by just 30,000.) In 2015, UK visitors comprised roughly just 2% of the total number of visitors to New York, but made up 10% of total international visitors.
International visitors have a higher propensity to spend than business visitors and domestic travellers because they typically stay longer and focus more on shopping. International visitors overall comprised 22% of all New York visitors in 2014, but accounted for 48% of total visitor expenditures.
While a contraction of more than 4% in UK GDP was most probably responsible for the 18% decline in UK visits to New York in 2009, it is likely that the 15% decline in the value of sterling against the dollar also did not help much.
Because lodging costs are the largest component (28%) of visitor spending, followed by shopping, at 22%, and food/beverage, at 20%, hotel revenue and operating income could be set to slow, exactly at the time that New York is set to see a large number of new hotel rooms come online. Average daily room rates have flatlined, with the average room rate in 2015 falling by 1% on 2014 and equal, at $291 per day, to the 2013 rate.
Despite an almost doubling of the total number of international visitors to New York since the early 2000s, annual increases in international tourist visits have started to slow (the UK sent more tourists to New York in 2007 and 2008 than in 2014 and 2015, for example).
Even so, between 2006 and 2015, the number of New York hotel rooms increased by almost 50%, equating to 34,400 rooms, and another 26,000 rooms are set to be built over the next few years.
It is unclear how well the supply of new rooms will be absorbed when visitor growth from one of the city’s largest sources has the potential to slow. UK visitors who remember when the pound was worth two dollars back in 2007 may be reluctant to plan a return trip any time soon.
The upside? UK tourism may see a boost given the pound’s decline. While France and the US are tied for first place as the countries that send the most visitors to London, spending by US tourists exceeds spending by French tourists by almost 2.5 times. Losses for New York hotels may spell gains for hotels in London.